MEDICARE PART D GUIDANCE FOR EMPLOYERS THAT DO NOT PROVIDE RETIREE DRUG BENEFITS

 

Prepared By: Patricia K. Keesler, Esq.

Benefits Law Group

September 1, 2005

 

 

The Medicare Modernization Act amends the Social Security Act to include a new, voluntary Medicare outpatient prescription drug benefit starting January 1, 2006 (Medicare Part D). Medicare Part D permits the creation of private prescription drug plans to be offered to individuals who are eligible for Medicare, including individuals who are entitled to Medicare Part A by age, end stage renal disease or disability, or are enrolled in Medicare Part B. Employers that provide prescription drug coverage for retirees may apply for a Federal Retiree Drug Subsidy. However this article focuses on the obligations of employers that do not offer retiree prescription drug coverage but do offer group health plan coverage to any active employee, retiree or dependent who is over age 65 or who is eligible for Medicare due to end stage renal disease or social security disability.

 

Step One: Employers must make sure their employees do not pay an unexpected late enrollment penalty when they sign up for Medicare Part D.

 

In order to get the Medicare Part D benefit at the lowest cost, a Medicare-eligible individual must sign up by the deadline. This is true even if the Medicare-eligible individual is already covered by an employer-sponsored prescription drug program when he or she becomes eligible for Medicare. The deadline is between November 15, 2005, and May 15, 2006, for the first year. In later years, open enrollment will be November 15 through December 31. The initial enrollment period for individuals who become newly eligible for Part D will begin 3 months before their eligibility, the month of eligibility and 3 months following eligibility. If the person misses the deadline, he or she will pay a significant late enrollment penalty UNLESS the person has been covered by a prescription drug program that provides “creditable coverage.”

 

In order to make sure that employees and their dependents do not have to pay unexpected late enrollment penalties when signing up for Medicare prescription drug coverage, Medicare Part D requires employers to 1) determine whether the prescription drug coverage they provide is “creditable coverage” at least as good as that provided by Medicare, 2) inform all the Medicare-eligible enrollees whether it is or is not, and 3) provide statements to Centers for Medicare and Medicaid Services (“CMS”) every year so CMS can ensure creditable coverage status.

 

 

 

Step Two: Employers must determine if their health plan offers prescription coverage that is “creditable coverage” under the safe harbor guidance.

 

Recent safe harbor guidelines issued by CMS enable companies to make the “creditable coverage” determination without the assistance of an outside actuary.[1]

 

Under the safe harbor for creditable coverage, prescription coverage will be “creditable” if it:

 

·      Covers both brand name and generic prescription drugs AND

·      Provides reasonable access to retail providers and, optionally, for mail order coverage; AND

·      s designed to pay on average at least 60% of the participants’ prescription drug expenses AND

 

FOR PRESCRIPTION ONLY PLANS (where prescription coverage has its own cost-sharing provisions that are separate from medical coverage), the drug plan must also meet one of these two requirements:

§       the prescription drug program must either have no annual benefit maximum or an annual benefit maximum of at least $25,000; OR

§       the prescription drug program must expect to pay benefits equal to at least $2,000 per Part D-eligible participant.

 

FOR INTEGRATED HEALTH AND PRESCRIPTION PLANS (where health plan includes integrated prescription drug and medical benefits, i.e. prescription costs and medical costs count toward the same deductible and maximums, and cost sharing provisions are the same for both medical and prescription costs), the health plan must also:

§       have a yearly deductible of no more than $250 AND

§       must have no annual benefit maximum or a maximum annual benefit payable by the plan of at least $25,000 AND

§       must have at least a $1 million combined maximum lifetime benefit limit.

 

Examples - Safe Harbor Analysis

 

Example 1. Employer A offers a high deductible health plan paired with a health savings account to its employees. The health plan includes medical and prescription coverage. All benefits (medical and prescription) other than preventive care benefits are subject to the deductible. Employer A does not offer retiree coverage. Prescriptions may be filled at retail outlets in the geographic area of the employees. Employees also have the option to fill prescriptions at a mail order pharmacy. The formulary is open and covers brand and generic prescriptions. The lifetime maximum is $5,000,000 and the yearly deductible is $1,800 (individual) $3,500 (family). Employer A does not offer creditable prescription coverage under the safe harbor because the plan is not designed to cover at least 60% of the prescription benefits. Note: The average individual would have to have total prescription costs of $4,500 per year in order for the plan to pay 60% of the costs and the participant to pay 40%. (1800 = .4x where x = total yearly prescription costs, x = $4,500). Moreover, the plan would fail the requirement for all integrated medical and prescription plans that the deductible be no higher than $250.

 

Example 2. Employer B has a prescription drug program that is separate from its health plan. The program has an annual drug deductible of $250 per covered person per calendar year, not to exceed $750 for all covered persons in a family. It covers brand and generic prescriptions, and participants may fill prescriptions at retail stores and mail-order pharmacies. The co-payments vary from $10 to $50 depending on the drug. There are no lifetime or annual maximums. The answer to whether Employer B offers creditable Prescription coverage under the safe harbor depends on whether the plan is designed to cover 60% of participants’ prescription costs. Employer B will need to get data from the pharmacy benefits manager in order to determine whether the plan pays 60% of prescription expenses after application of deductibles and co-payments.

 

Example 3. Employer C has an integrated health and prescription plan with two benefit options - HMO and PPO. Prescription costs count toward the deductible and maximums, and the cost sharing rules are the same for prescription and medical costs. HMO has a $100 deductible (single) and a $200 deductible (family). PPO has a $250 deductible (single) and $500 deductible (family). Deductibles are applied on an individual basis, so that each covered individual will receive benefits after his or her own deductible has been satisfied. Both options have a $1 million annual policy limit and a $5 million lifetime limit. Brand and generic prescriptions are covered and participants may fill prescriptions at retail and mail order pharmacies. Data from the pharmacy benefits manager indicates that the plan pays 65% of all prescription costs. Employer C must review each benefit option to determine whether it offers creditable prescription coverage under the safe harbor.

 

·      Option 1 HMO, single coverage - yes. This option meets all requirements.

·      Option 2 HMO, family coverage - yes. This option meets all requirements.

·      Option 3 PPO, single coverage - yes. This option meets all requirements.

·      Option 4 PPO, family coverage - most likely yes. This option has a deductible higher than $250, but since the deductible is no more than $250 per individual, no Medicare eligible individual will be subject to a deductible that is greater than $250. Therefore, the coverage should be creditable.[2]

 

Example 4. Employer D uses a pharmacy benefits manager. Although medical and prescription coverage benefits are provided under the same health plan, prescription costs do not count toward the deductible or the maximum limits for the health plan. Instead, individuals pay co-payments for each prescription according to a special formula. There is no annual or lifetime maximum for prescription benefits. Brand and generic prescriptions are covered and participants may fill prescriptions at retail and mail order pharmacies. Data from the pharmacy benefits manager indicates that the plan pays 65% of all prescription costs. Employer D offers creditable prescription coverage under the safe harbor. Because it is not an integrated plan, it will be considered creditable coverage as long as it meets either of the requirements for prescription only plans. It satisfies the first option because there is no annual limit on prescription benefits.[3]

 

Step Three: What to do if any option fails the safe harbor.

 

If any Plan option does not pass the safe harbors, the employer can work with the pharmacy benefits manager to identify new plan designs to pass the safe harbor, or the employer can work with an actuary to obtain an opinion of whether the coverage is creditable. The CMS guidance clearly states that prescription drug programs do not need to obtain an attestation from an outside actuary if the program does not cover retirees. However, an actuary will be able to determine whether the coverage is creditable even if the plan does not meet the provisions of the safe harbor. This determination may be more cost effective than plan redesign and the communications that would be required in order to meet the safe harbor. Moreover, if current plan design does not fall squarely into the safe harbor, the employer should consider getting an actuary’s opinion before making an official statement to plan participants that the coverage is creditable.

 

 

Step Four. The Employer must prepare the notice of creditable coverage to participants and CMS.

 

CMS has prepared model notices for employers to distribute to plan participants. These may be found at http://www.cms.hhs.gov/medicarereform. The first disclosure notices must be sent to participants by November 15, 2005. After that disclosure notice, the simplest way to make the disclosure is to provide it to all plan participants once a year in open enrollment materials and to each new participant upon enrollment. The disclosure must be provided again if any changes to the plan affect the contents of earlier disclosures, or if any participant requests the notice.[4] The CMS has not yet provided guidance on preparing notices to CMS.